Three Things I'm Watching in the Tariff War

The markets are coming off a negative and holiday-shortened trading week. Last week, the major indexes gave back some of the large gains from the previous week. Both the Dow and Nasdaq lost just over 2% on the week while the S&P 500 was off 1.5%. Of note, small caps that badly outperformed during the previous week’s rally, managed to post a gain last week with the Russell 2000 up just over 1% on the week.

A Deal, Any Deal

Unsettled and uncertain are probably two of the best ways to describe the current market. I expect equities will continue to lack clarity or direction until investors get a much better feel to how everything will work out on the tariff and trade front. Before stocks can stabilize and move higher, we need to see some wins resulting in the new administration’s radical departure from long standing tariff and trade policies. While this existing trading regime has dramatically eroded the U.S.’ trade balances over the past few decades, the world had become quite comfortable with the status quo. The quick reversal of these long-standing trade rules has led to a huge uptick in volatility across the global equity, credit and currency markets.

It would buoy sentiment if new trade deals get announced over the next few weeks -- or at least agreed upon trade frameworks with the suspension of some tariffs while the details are worked out within these new agreements. This would be a significant positive for the markets. 

All Eyes on China 

Investors will also be watching intently to see how the emerging trade war between the two largest economies in the world develops. How China reacts to this new trading paradigm will be fascinating to watch. It also will be a major factor to the direction and stability of the global economy and markets going forward.

Does the country devalue its currency significantly, which would anger its trade partners further, as well as diminish its citizens' buying power? Do it reroute trade from the U.S. to places where it already has large trade surpluses, like Europe or Asia, where historical rivals like Japan, Vietnam and Korea are already concerned with the country’s growth and more aggressive military presence in the region? Does China come to the table with the U.S. and agree to a much more balance trade relationship?

Employment Trade-Offs

So far, new tariff policies have not resulted in significant changes to the labor market. The March Bureau of Labor Statistics jobs report was robust and weekly unemployment claims have remained stable. Employers appear to be putting off major shifts in their labor forces while waiting to see how this new trade regime works out. That could very well change over the next few weeks and months. If widespread layoffs begin to be announced, it will obviously negatively impact consumer confidence and the economy as well as the markets.

At the time of publication, Jensen had no position in any security mentioned.